Macroeconomic determinants of the exchange rate: Time-series evidence (2013–2024)

Abstract

Exchange rate stability is crucial for macroeconomic performance, trade competitiveness, and investment flows. This study investigates the macroeconomic determinants influencing the exchange rate in Malaysia, focusing on the impact of interest rates, broad money supply, and the unemployment rate on the Malaysian Ringgit (MYR). Utilizing monthly secondary data from 2013 to 2024, the research employs Ordinary Least Squares (OLS) regression via EViews 12. Diagnostic tests, including the Augmented Dickey-Fuller (ADF) unit root test, normality test, and Newey-West HAC standard errors, were conducted to ensure robustness. The findings reveal that all three variables, interest rate, broad money supply, and unemployment rate, exert a significant positive relationship with the exchange rate. It shows that increases in these domestic variables are associated with a depreciation of the Ringgit. The study concludes that domestic macroeconomic stability is a more critical driver of currency fluctuations than external shocks, recommending strategic monetary management and labour market reforms for exchange rate stability.